The Race for Data – Electronic Trading in Fixed Income
History
Electronic trading is nothing new in products such as Equities, FX and even Government Bonds, but the more illiquid products have been traded traditionally until relatively recently. Corporate Bonds are one such product that have undergone significant changes in the way they are traded in the last 15 years. As a relatively illiquid, or scarce, instrument the customer would carefully consider which dealer to contact to enquire about a price. This would have been done via telephone, or the Bloomberg email or messenger service. It was simple, effective at the time, and required little in-house technology from the dealers or clients. Brokers would act as intermediaries between the banks to enable the dealers to de-risk following customer trades.
Post 2008 Situation
Following the Financial Crisis, banks found their balance sheets much reduced and this quickly became a problem for customers. The probability of calling a dealer to achieve an attractive price reduced substantially which led to the extra time burden of hunting around longer for a price and crucially the information loss, where the market becomes aware of what trades you wanted to do before you actually manage to execute.
Pre-2008, three ECNs (Electronic Connectivity Networks) had begun to link clients to many dealers via software installed on traders’ screens. These were Bloomberg, MarketAxess and Tradeweb. As clients found it more difficult to successfully trade following the crisis, trading activity migrated to these platforms that enabled a more efficient, and often discrete way of requesting a quote. Europe saw the first wave of the move to ‘E’, with US clients accelerating their growth from 2014 onwards. A natural consequence of this evolution in trading protocol was that dealers needed more technology to respond to the increased number of pricing requests, as well as more information to enable them to accurately price the enquiries being received. Trading protocols also became more sophisticated – Firm Pricing, All to All protocols, Axe dissemination – all required enhanced technology.
Automated Market Makers
2015 saw the introduction of automated market makers (algos). Dealers were becoming swamped with pricing requests, especially in smaller size, and needed to increase efficiency to provide this service for their clients. A bi-product of this increased electronic flow was the data footprint it left. In 2005 the data from a telephone enquiry was lost as the conversation ended, but in 2015 many thousands of enquiries were being handled by the trading venues (ECNs) which contained information that both dealers and clients were keen to consume. The best algos would constantly improve their pricing with real-time consumption of market enquiry data, internal trade data and even data from other asset classes such as equities.
The Race for Data
Dealers and clients have been increasingly focussed on capturing, storing and using the data that has become available in the market. Following MIFID II implementation, more trading moved electronic and the mandated reporting rules made even more sources of trade data available. Recently, Europe embarked on an industry project to develop a semi real-time consolidated tape of trading activity, much like TRACE in the US.
https://www.afme.eu/Key-issues/MIFID/Consolidated-Tape
A consolidated tape would be the first time in European Credit that all trades are publicised to the market and thus available as an accurate pricing point for clients and dealers to reference. The algos will consume this data to continually refine their offerings.
In addition to the algos, trade and enquiry data is also crucial to sales desks across the dealers. As the telephones rang less, and electronic enquiry increased, the sales person had to have access to more sophisticated tools to stay in touch with his/her client’s objectives. In 2022 a Salesperson is likely to have access to a multitude of tools to immediately see Client trading trends, predicted bonds of interest to the Client as well as pricing relative value analysis of enquired bonds versus others in that sector.
This race for data continues to dominate with new forms becoming available (and more comprehensive) all the time, for example disclosed Client bond holdings, Fixed Income ETF pricing and Portfolio Trading enquires & trades.
How Bailrigg Expertise Can Help
Bailrigg have deep expertise in advising on Fixed Income Electronic Trading strategy, as well as strong Project Management and Business Analysis capabilities within the Technology functions that support this business. Bailrigg contributed to the development of one of the first algos in the industry and remains heavily involved in the newest innovations within Fixed Income Electronic trading.
If you would like any further information, please do not hesitate to reach out to Tom Hutchings, Head of Global Business Development tom.hutchings@bailrigg.co.uk.
Author: Mike Armer – Markets Strategy and Technology
September 2022